Cbeyond Reports First Quarter 2014 Results

ATLANTA, May 7, 2014 (GLOBE NEWSWIRE) -- Cbeyond, Inc. (Nasdaq:CBEY), ("Cbeyond"), the technology ally for small and mid-sized businesses, today announced its results for the first quarter ended March 31, 2014.

Recent financial and operating highlights include:

• First quarter 2014 total revenue of $108.5 million compared with $119.9 million in the first quarter of 2013 and $111.5 million in the fourth quarter of 2013;
   
• Cbeyond 2.0 revenue was $24.5 million, or 22.5% of total revenue in the first quarter of 2014, an increase of 78.1% from the first quarter of 2013 and an increase of 19.0% from the fourth quarter of 2013; 
   
• Average monthly revenue per customer (ARPU) of $661 during the first quarter of 2014 compared with $656 in the first quarter of 2013 and $658 in the fourth quarter of 2013 (see selected quarterly operating metrics table for ARPU definition);
   
• Adjusted EBITDA of $16.9 million in the first quarter of 2014 compared with $20.8 million in the first quarter of 2013 and $17.7 million in the fourth quarter of 2013 (see reconciliation tables for reconciliation of Adjusted EBITDA to net loss);
   
• Free cash flow (defined as adjusted EBITDA less cash capital expenditures) of $4.0 million in the first quarter of 2014 compared with $8.4 million in the first quarter of 2013 and $3.6 million in the fourth quarter of 2013;
   
• Net loss of $5.9 million in the first quarter of 2014 compared with net loss of $0.6 million in the first quarter of 2013 and a net loss of $4.9 million in the fourth quarter of 2013; and,
   
• On April 21, 2014, Cbeyond announced a definitive agreement in which Birch Communications will acquire Cbeyond in an all-cash transaction valued at approximately $323.4 million, subject to certain conditions (see the 8-K filed on April 21, 2014 for more information, which includes the Agreement and Plan of Merger as an attached exhibit).  

Management Comments

"First quarter results reflect the steps we are taking to emphasize our 2.0 business," said Jim Geiger, chief executive officer of Cbeyond, Inc. "Cbeyond is excited about the combination with Birch Communications, which will not only create a stronger company with expanded capabilities and reach to serve customers nationwide with a broad array of products but will also bring increased stockholder value and liquidity for our stockholders."

First Quarter Financial and Business Summary

Revenue and ARPU

Cbeyond reported total revenue of $108.5 million for the first quarter of 2014, a decrease of 9.5% from the first quarter of 2013 and a decrease of 2.7% from the fourth quarter of 2013. Revenue decreases were largely the result of the decline in the number of customers. Total 2.0 revenue grew 78.1% year-over-year during the quarter to $24.5 million, with Managed Hosting and Cloud revenue of $8.6 million, an increase of 30.9% year-over-year. ARPU was $661 in the first quarter of 2014 compared with $656 in the first quarter of 2013 and $658 in the fourth quarter of 2013. 

Cost of Service and Gross Margin

Cbeyond's gross margin was 66.3% in the first quarter of 2014, a decrease of 140 basis points from the 67.7% in the first quarter of 2013 and a 140 basis point increase from the 64.9% in the fourth quarter of 2013. The year-over-year decrease in gross margin was due largely to higher access costs to provide additional bandwidth to our customers.

Adjusted EBITDA and Net Loss

Adjusted EBITDA for the first quarter of 2014 was $16.9 million compared with adjusted EBITDA of $20.8 million in the first quarter of 2013 and $17.7 million in the fourth quarter of 2013. 

Cbeyond reported a net loss of $5.9 million in the first quarter of 2014 compared with a net loss of $0.6 million in the first quarter of 2013 and a net loss of $4.9 million in the fourth quarter of 2013. 

Cash, Cash Equivalents, and Borrowings

Cash and cash equivalents were $26.3 million at the end of the first quarter of 2014 compared with $28.9 million at the end of the fourth quarter of 2013. The Company currently has $2.0 million outstanding on its fiber loan and has no outstanding borrowings under its $75.0 million revolving credit facility. The Company also has $17.0 million in outstanding capital lease obligations at March 31, 2014, primarily incurred in connection with the construction of its fiber network.

Capital Expenditures

Total capital expenditures were $14.2 million during the first quarter of 2014, of which $12.9 million were cash capital expenditures. The Company incurred $1.2 million in non-cash capital expenditures during the first quarter, consisting of capital lease obligations related to its fiber assets. In the first quarter of 2013, total capital expenditures were $15.5 million, of which $12.4 million were cash capital expenditures. In the fourth quarter of 2013, total capital expenditures were $17.2 million, of which $14.1 million were cash capital expenditures.

Free Cash Flow

Free cash flow, defined as adjusted EBITDA less cash capital expenditures, was $4.0 million in the first quarter of 2014 compared with $8.4million in the first quarter of 2013 and $3.6 million in the fourth quarter of 2013.

Share Repurchase Plan

There were no share repurchases in the quarter.   

Business Outlook for 2014

As a result of the announcement that Cbeyond has entered into a definitive agreement to be acquired by Birch Communications, Cbeyond withdraws its previously issued guidance for 2014.

Conference Call

As a result of the announcement that Cbeyond has entered into a definitive agreement to be acquired by Birch Communications, the first quarter 2014 earnings conference call and webcast has been cancelled.

About Cbeyond

Cbeyond, Inc. (Nasdaq:CBEY) is the technology ally for small and mid-sized businesses. We enable our customers to focus on their core business activities by shifting the burden of IT infrastructure management to us. We deliver cloud services, communications and connectivity through award-winning enterprise data centers and a private, IP enterprise network. Founded in 1999, Cbeyond is a technology service provider with a long history of delivering technology and service innovation for small and mid-sized businesses. Please visit www.cbeyond.com for more information.

Forward-Looking Statements

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements identified by words such as "expectations," "guidance," "believes," "expects," "anticipates," "estimates," "intends," "plans," "targets," "projects" and similar expressions. Such statements are based upon the current beliefs and expectations of Cbeyond's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. Factors that might cause future results to differ include, but are not limited to, the following: finalization of operating data, the significant reduction in economic activity, which particularly affects our target market of small to mid-sized businesses; the risk that we may be unable to experience revenue growth at anticipated levels; changes in business climate or other factors affecting our customer base; the risk of unexpected increases in customer churn levels; our ability to manage competitive pricing dynamics in our markets; changes in federal or state regulation or decisions by regulatory bodies that affect Cbeyond; periods of economic downturn or unusual volatility in the capital markets or other negative macroeconomic conditions that could harm our business, including our access to capital markets and the impact on certain of our customers to meet their payment obligations; the timing of the initiation, progress, or cancellation of significant contracts or arrangements; the mix and timing of services sold in a particular period; our ability to recruit and maintain experienced management and personnel; rapid technological change and the timing and amount of start-up costs incurred in connection with the introduction of new services or the entrance into new markets; our ability to maintain or attract sufficient customers in existing or new markets; our ability to comply with our credit facility covenants; continued industry consolidation that could further strengthen our competitors; our ability to respond to increasing competition; our ability to manage the growth of our operations; changes in estimates of taxable income or utilization of deferred tax assets which could significantly affect the Company's effective tax rate; regulatory action relating to our compliance with customer proprietary network information; the possibility that economic benefits of future opportunities in an emerging industry may never materialize, including unexpected variations in market growth and demand for products and technologies; unfamiliarity with the economic characteristics of new geographic markets; ongoing personnel and logistical challenges of managing a larger organization; our ability to effectively manage the evolving needs of our customers or increasing product complexity; external events outside of our control, including extreme weather, natural disasters, pandemics, or terrorist attacks that could adversely affect our target markets; the risk that our security measures are breached, which inhibits the ability of users to access our services, changes the perception of our services, or results in litigation and potential liability; our ability to implement and execute successfully our new strategic focus; our ability to expand fiber availability; the extent to which small and mid-sized businesses continue to spend on cloud, network, and security services; our ability to recruit, maintain, and grow a sales force focused exclusively on technology-dependent customers; our ability to integrate new products into our existing infrastructure; the effects of realignment activities; the risk that our strategic review process may not result in increased shareholder value; the extent to which our customer mix becomes more technology-dependent; our ability to achieve future cost savings related to our capital expenditures and investment in Ethernet technology; general economic and business conditions; the risk that we may be unable to obtain stockholder approval as required for the proposed merger with Birch Communications, Inc. (the "Merger); the risk that conditions to the closing of the Merger may not be satisfied and required regulatory approvals may not be obtained; the risk that Birch will not obtain the financing required to consummate the merger, the effect of unexpected costs, liabilities or delays related to the Merger; the risk that our business may suffer as a result of uncertainty surrounding the Merger; the outcome of any legal proceedings related to the Merger; the risk that we may be adversely affected by other economic, business, and/or competitive factors; the effect of the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement; risks that the Merger disrupts current plans and operations and the potential difficulties in employee retention as a result of the Merger; and other risks to consummation of the Merger, including the risk that the Merger may not be consummated within the expected time period or at all. You are advised to consult any further disclosures we make on related subjects in the reports we file with the Securities and Exchange Commission, or SEC, including the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent annual report on Form 10-K, together with updates that may occur in our quarterly reports on Form 10-Q and Current Reports on Form 8‑K. Such disclosure covers certain risks, uncertainties, and possibly inaccurate assumptions that could cause our actual results to differ materially from expected and historical results. We undertake no obligation to correct or update any forward‑looking statements, whether as a result of new information, future events, or otherwise. 

Key Operating Metrics and Non-GAAP Financial Measures

In this press release, the Company uses several key operating metrics and non-GAAP financial measures. The Company defines each of these metrics and provides a reconciliation of non-GAAP financial measures to the most directly comparable generally accepted accounting principles in the United States, or GAAP, financial measure. These financial measures and operating metrics are a supplement to GAAP financial information and should not be considered as an alternative to, or more meaningful than, net income (loss), cash flow or operating income (loss) as determined in accordance with GAAP.

Adjusted EBITDA

Cbeyond's Chief Executive Officer, who is the Company's Chief Operating Decision Maker (or "CODM"), uses adjusted EBITDA to assess the performance of the business at a consolidated level. Adjusted EBITDA is a non-GAAP financial measure. The Company's management uses adjusted EBITDA in its decision-making processes relating to the operation of our business together with GAAP measures such as revenue and income (loss) from operations. EBITDA represents net income (loss) before interest, income taxes, depreciation, and amortization. The Company defines adjusted EBITDA as net income (loss) before interest, income taxes, depreciation, and amortization expense, excluding, when applicable:

• Non-cash share-based compensation;
• Gains, losses, and other costs associated with asset dispositions;
• Non-operating income or expense;
• Public offering or acquisition-related transaction costs;
• Purchase accounting related adjustments, which affect period-to-period financial performance comparability in periods subsequent to the acquisition and are not indicative of changes in underlying results of operations;
• Charges for employee severances, asset or facility impairments, other exit activity costs associated with a management directed plan (including realignment costs); and
• Costs associated with our strategic review.

The Company's management believes that adjusted EBITDA permits a comparative assessment of its operating performance, relative to the Company's performance based on its GAAP results, while isolating the effects of depreciation, amortization, non-cash share-based compensation, and other items, which may vary from period to period without any correlation to underlying operating performance and vary widely among similar companies. Cbeyond provides information relating to adjusted EBITDA so that investors have the same data that the Company employs in assessing its overall operations. The Company's management believes that trends in the Company's adjusted EBITDA are a valuable indicator of operating performance on a consolidated basis and its ability to generate operating cash flows to fund working capital, debt and capital lease obligations, and capital expenditures.

In addition, the Company's management believes adjusted EBITDA is a useful comparative measure within the communications industry because the industry has experienced merger and acquisition activity and financial restructurings, which have led to significant variations among companies with respect to capital structures and cost of capital (which affect interest expense), and differences in taxation and book depreciation of facilities and equipment (which affect relative depreciation expense), including significant differences in the depreciable lives of similar assets among various companies, as well as non-operating or infrequent charges to earnings, such as the effect of debt restructurings.

Accordingly, Cbeyond's management believes adjusted EBITDA allows analysts, investors and other interested parties in the communications industry to facilitate company-to-company comparisons by eliminating some of the foregoing variations. Adjusted EBITDA as used in this report may not, however, be directly comparable to similarly titled measures reported by other companies due to differences in accounting policies and items excluded or included in the adjustments, which limits its usefulness as a comparative measure.

Cbeyond's calculation of adjusted EBITDA is not directly comparable to earnings before interest and taxes (or "EBIT") or EBITDA. In addition, adjusted EBITDA does not reflect:

• Cash expenditures, or future requirements, for capital expenditures or contractual commitments;
• Changes in, or cash requirements for, working capital needs;
• Interest expense or the cash requirements necessary to service interest or principal payments on the Company's debt and capital lease obligations;
• Any cash requirements for the replacement of assets being depreciated and amortized, which will often have to be replaced in the future, even though depreciation and amortization are non-cash charges; and
• Cash used for business acquisitions and share repurchases.

Adjusted EBITDA is not intended to replace operating income (loss), net income (loss) and other measures of financial performance reported in accordance with GAAP. Rather, adjusted EBITDA is a measure of operating performance to consider in addition to those measures. Because of these limitations, adjusted EBITDA should not be considered as a measure of discretionary cash available to Cbeyond to invest in the growth of its business. The Company's management compensates for these limitations by relying primarily on our GAAP results and using adjusted EBITDA as a supplemental financial measure.

Free Cash Flow

Free cash flow represents the cash that a company is able to generate after cash expenses and capital expenditures necessary to maintain or expand its asset base. The Company's management believes that free cash flow is an important metric for investors in evaluating how a company is currently using cash generated and may indicate its ability to generate cash that can potentially be used by the business for capital investments, acquisitions, reduction of debt, payment of dividends, or share repurchases. Internally, the Company's management focuses on free cash flow as an important operating performance metric. However, free cash flow is not a measure of financial performance under GAAP and may not be comparable to similarly titled measures reported by other companies.

Cbeyond defines free cash flow as adjusted EBITDA less cash capital expenditures. For purposes of calculating free cash flow, we distinguish capital expenditures that require the up-front outlay of cash from those where payment is deferred on a longer-term basis. This distinction is primarily driven by the significant investments Cbeyond is making to lease fiber network assets that have an expected useful life of 20 years, which is substantially longer than the Company's typical asset lives. The Company's management believes this distinction is warranted and appropriate since these investments are expected to yield meaningful positive cash flows in future periods when the debt and lease payments occur. These expected favorable future cash flows will result from fiber infrastructure replacing a portion of the access and transport circuits the Company currently leases from incumbent local exchange carriers.

(1) Calculated for each period as the average of monthly churn, which is defined for a given month as the number of network access customers disconnected in that month divided by the number of network access customers on the Company's network at the beginning of that month.

(2) Calculated as the revenue for a period divided by the average of the number of network access customers at the beginning of the period and the number of network access customers at the end of the period, divided by the number of months in the period. Revenue used to calculate ARPU is defined as the revenue associated with customers where Cbeyond provides network access and includes all Network, Voice and Data revenue and the portion of Managed Hosting and Cloud revenue where Cbeyond provides network access.